In 2017, the Chinese Government has made a strong push for its "coal to gas" conversion policy in Beijing, Tianjin and Heibei with an aim to improve the smog pollution problem. However, due to the incomplete installation of natural gas equipment, it resulted in a supply shortage in a lot of places across the region. This led to a rapid demand surge for liquefied natural gas (LNG) as an alternative. It is noteworthy that as natural gas supply in China is mainly delivered through pipeline, LNG only accounted for about 10% of the overall gas supply. As such, China’s LNG price soared to over 10,000 yuan in December 2017 within one month from 4,000 yuan in November 2017. More importantly, as we expect the natural gas supply shortage to linger, gas companies will come under rising margin pressure. In light of this, we believe gas supply is set to be the key investment theme for the gas sector in China this year. In 2017, China surpassed South Korea as the world's second largest LNG importer, with its LNG import volume rose 46% year-on-year to 38.13 million tons. Given it is cheaper to use imported gas compared to that of domestic products, we believe those gas companies owning more LNG storage facilities are set to fare better due to lower production cost which in turn helps to improve margin. All in all, as we believe "coal to gas" conversion policy will remain to be the key policy push by the Chinese Government in the next few years, we advise investors to buy into those gas stocks with LNG storage facilities as a long-term holding.

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